Solution Chapter 1 - 2 - Investment

* By CAPM, we can get (8.3277%). We can calculate the each of different companies and get the average value. Or we can use CAPM once from average =0.8155. These two results are equivalent.

21. Universal Forests current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate what is the required return?

An investment in a tax-exempt (municipal) bond with an interest rate of 8 percent is preferable to an investment in a taxable (corporate) bond with an interest rate of 10 percent.

of tax is 40%, it means that before tax cost of capital is 6.5% and after tax cost of capital is 3.9%.

1. Visit the website of a large national bank, regional bank, or credit union, and use the information you find there to answer the questions below. EXAMPLE: Some large banks you might consider include Bank of America®, JPMorgan Chase®, Wells Fargo®, Citibank®, and U.S. Bank®.

The CEO of Dynamic Manufacturing was at a conference and talked to a supplier about a new piece of equipment for its production process that she believes will produce ongoing cost savings. As the Operations Manager, your CEO has asked for your perspective on whether or not to purchase the machinery.

1. Testing many different trading rules until you find one that would have worked in the past is called _______.

As shown by Figure 2, the total return from these transactions will be $1861.72. Based on the input of own funds, the total annualized return on that transaction would be 6.076%. Figure 3 shows in addition the return on the overall employed funds.

If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.

That rate was determined by the rating of the bond. Bond ratings are derived from a

2. Actual return was calculated for all the companies as well as for the BSE 500 on the event period days (-60 to +60).

The success of the model is attributed to Yale’s ability to combine both quantitative analysis (mean-variance analysis) with market judgments to structure its portfolio. In addition, Yale also uses statistical analysis to actively test their models with factors affecting the market, therefore understanding the sensitivity of their portfolio in response to various market changes. Yale also follows and forecasts the cash flow of private equity and real assets in its portfolio to decide the need for hedging.

REFERENCES•Ross, S.A., Westerfield, R.W., Jaffe, J., Jordan, B.D. "Modern Financial Management". McGraw-Hill, Eighth Edition, (2008)•R.A. Brealey and S.C. Myers, "Principles of Corporate Finance", McGraw-Hill, Seventh Edition, (2003).

Pooling Resources and Subdividing Shares: The financial markets allow firms to borrow from pooled resource of multiple investors and allow investors to diversify by investing in various

In a world without uncertainty the rational approach would be (1) to maximize profits and (2) to maximize market value. When uncertainty arises, these statements vanish and change into a utility maximization. The goal is to get more insight in the effect of financial structure on market valuations.